Real estate commissions on homes in the US are typically between 5-6%. And it is usually split between the seller's agent and the buyer's agent (or it goes all to one agent in the case of dual-ended deals). It is also customary for this commission to be paid entirely by the seller (through the proceeds of their sale), though you could argue that buyers end up paying for it indirectly. All of this is generally true in Canada as well.

This is a good set up:

• Sellers don't pay until they sell and have fresh cash

• Money being deducted from proceeds (the "take rate") is a lot less noticeable and has a lot less friction than cash you just have to pay out

• Buyers kind of don't pay

This last point is one of the most important features of how real estate commissions work. Because you have one side of the transaction that feels as if they're mostly not paying, it generally helps to perpetuate the status quo. If both sides had to directly fork out cash, you'd likely have a lot more people saying, "hey, why don't we consummate this transaction over here, on the side, and not pay these fees."

But it turns out that the US Department of Justice isn't happy about some of these policies and practices. More specifically, when the National Association of Realtors does things like this:

• Prohibiting multiple listing services (“MLSs”) from disclosing to prospective buyers the amount of commission that the buyer broker will earn if the buyer purchases a home listed on the MLS (“NAR’s Commission Concealment Rules”);

• Allowing buyer brokers to mislead buyers into thinking that buyer broker services are free (“NAR’s Free-Service Rule”);

• Enabling buyer brokers to filter MLS listings based on the level of buyer broker commissions offered and to exclude homes with lower commissions from consideration by potential home buyers (“NAR’s Commission-Filter Rules and Practices”); and

• Limiting access to lockboxes that provide licensed brokers physical access to a home that is for sale to only those real estate brokers who are members of a NAR-affiliated MLS (“NAR’s Lockbox Policy”).

In fact, these practices were found to be anti-competitive; they were arguably keeping commissions artificially high. So much so that a federal court recently awarded $1.8 billion in damages. It was also decided that no rule or practice should exist that:

• Prohibits, discourages, or recommends against an MLS or MLS Participant publishing or displaying to consumers any MLS database field specifying the compensation offered to other MLS Participants;

• Permits or requires MLS Participants, including buyer brokers, to represent or suggest that their services are free or available to a client at not cost to the client;

• Permits or enables MLS Participants to filter, suppress, hide, or not display or distribute MLS listings based on the level of compensation offered to the buyer broker or the name of the brokerage or agent; or

• Prohibits, discourages or recommends against the eligibility of any licensed real estate agent or broker, from accessing, with seller approval, the lockboxes of those properties listed on an MLS.

Some believe that this ruling -- which will create more competition -- could reduce the $100 billion or so of commissions paid each year (in the US) by as much as 30%. This is possible. I have no idea how this estimate was calculated. But it does make intuitive sense that commissions should come down. This ruling gets at the heart of what sustains the industry: one side of the marketplace needs to feel that they're, mostly, not really, paying.

This past Sunday I was over at my father’s place for dinner and we were talking about the high transaction costs associated with buying and selling homes. That is, we weren’t talking about the high price of homes in Toronto, we were only talking about transaction costs and barriers to market liquidity.

For example, let’s say for the sake of simplicity that you own a home that’s worth $1 million and you’d like to sell it and buy a different home that also happens to be worth $1 million. In this case, you’d be making an entirely lateral move. You’re not down sizing or up sizing, you just want a different home–perhaps because you’d prefer a different neighborhood.

In order to do this, you’re going to be faced with a number of costs. But the 2 most significant are real estate commissions and Land Transfer Taxes (both provincial and municipal). You only pay Land Transfer Taxes in Toronto when you buy (take title) of a new property, but they’re unavoidable, unless you’re a first time buyer, in which case you’d qualify for a bit of a rebate.

Real estate commissions are technically optional, but 70-90% of the market in North America still uses a a real estate agent to sell their home (based on the estimates I’ve found). Typically a seller pays around 5% of the sale price. So in this example, you the homeowner would be paying around $50,000 in real estate commissions.

Land Transfer Taxes would be roughly $32,000, and so you’re looking at a total somewhere around $82,000 in order to make this lateral move. This, of course, does not include legal fees or any other moving costs you might incur. It’s a hell of a lot of money and it’s a significant barrier to transacting.

But my hunch is that we’ll eventually see real estate commissions come down. No real estate agent wants to hear this, but I think it’s almost inevitable. The internet, as a disruptive force, is bound to make it happen.